Ch7: Taxation on Non-BLAGAB

[kntg24]

In page 9, it states that:
The calculation of that profit requires consistency between:

• the income and gains included in the revenue account for non-BLAGAB business(which increases profits) and
• the increase in policy liabilities due to income and gains earned on investment premiums(which reduces profits).

I don’t really understand the relationship between these two points and why does incomes and gains earned on investment premiums will increase the policy liabilities? Aren’t the gains will reduce insurer’s liabilities?

 

[Lindsay Smitherman]

Hi

Policy liabilities for unit-linked and with-profits contracts will increase as investment return is earned, since this will increase the unit fund or asset share respectively. For without-profits contracts, the equivalent concept is the increase in liabilities that occurs as you move forwards in time, as the cashflows are discounted by one less period.

Profit (in basic terms) = Premiums - Claims - Expenses + Investment return - Increase in liabilities

What this part of the Core Reading is saying is that there should be consistency between what is included in the 'Investment return' and 'Increase in liabilities' components. For example, since the unit fund part of unit-linked business liabilities increases with unrealised gains, the investment return component should also include unrealised gains.

 

[kntg24]

Thanks for the reply Lindsay!
Can I say that since the amount in the unit fund / asset share will be paid out to the policyholders, it is considered as a liability to the insurance company?

 

[Lindsay Smitherman]

Yes, that's right: the largest part of the insurer's liabilities is its obligation to pay benefits to policyholders, and for UL and WP business the benefits will be based on unit fund and asset share respectively.